ABS Venture Debt: Artificial Intelligence, Real but Contained Risk

Artificial intelligence (AI) is an emerging area of focus for private credit markets, particularly for lenders with exposure to software and technology borrowers. AI-related disruption is expected to unfold gradually but is already influencing lender behavior, borrower performance, and investor sentiment, as noted in KBRA’s Private Credit: Deep Dive on AI and Software. KBRA is monitoring potential implications for ABS venture debt transactions (which also include health care and other relatively sector-specific ABS transactions), given the presence of software and technology companies in venture lending portfolios, where cash flows depend on borrower performance, valuation, and refinancing capacity.

AI-driven credit risks are primarily indirect and may manifest through several channels, including: (i) pricing pressure and customer churn for software businesses…